Parents want to provide a gift of approx 250k to their child (Child is married with a child of their own). This will be done in the form of a lump sum check. For tax purposes, which of the following makes sense (and is legit)?

1. Structure as a Gift, use the 13k exemption to reduce the overall gift value, but still report on taxes (whose?). Since this is below the lifetime giving limit, there should be no tax liability (?)

Pro: Simple - one time transaction.Con: Possible tax liability.

2. Structure as a Loan, paying market interest, that is partially forgiven each each in the value of the gift exemption (currently 13k). Loan will be at Market rate, interest payable annually.

Pro: No tax liability (as its a loan). Some interest income for the parents.Con: Additional paperwork. Must pay interest back to parents annually until loan is fully forgiven.

Would love to hear any advice or comments, especially from people who have gone through a situation like this.

Adding to JAFO's reply, the remaining $150K would be subject to gift tax. The parent (or parents) would file a Gift Tax return reporting the excess. Assuming that neither parent has exceeded their $1M lifetime gift exclusion, no tax would be due with the return.

As usual, gifts are not income to the recipient so the son and wife have nothing to report.

I'd look at what the interest rate is for a $200K loan ($52K of the $250K can be gifts between the 2 parents and the son and his wife as pointed out by others)

So avoiding using up the lifetime giving limit would cost the imputed interest * the parents' marginal tax rate. Which probably wouldn't be a very large amount. Hard to say without more knowledge which would be the right choice - it depends on what they've got for assets / plans for the disposal of those assets after they die (or as gifts in the future). Since they have $250K to give to their son, that would argue that they do have significant assets that it might be worthwhile to keep the gift tax exclusion in tact, even though it'll cost them something like $150K*3%*33% = $1485 (maybe less - really have to look up whether 3% is right on the table, and 33% is just a guess for their marginal tax bracket.)

(maybe less - really have to look up whether 3% is right on the table, and 33% is just a guess for their marginal tax bracket.)

Now that I've been able to look at the table - it looks like 0.44% is the right rate (make the loan for $200K for 3 years) So cost to preserve the parent's exclusion would be:0.44% * 3/12 * $52K * MTR + 0.44% * 15/12 * $52K * MTR+ 0.44% * 27/12 * $52K * MTR+ 0.44% * 36/12 * $44K * MTR+ ???? * 3/12 * $44K * MTR (the 44K at the end has to get 3 more months to be after Jan 1.)